If the inquiry was conducted and the culpability of the employee was proven, then what is the point in keeping this employee? Impeccable conduct is a prerequisite of employment. Why is your management developing cold feet in sacking him? Tolerance towards underperformance or non-performance is still understandable, but this is a plain integrity issue.
Just recently, Yahoo's CEO resigned because he had made a false claim on his CV about his degree. During my HR days, I still remember my VP had sacked a young employee because security had caught her carrying four used lead pencils!
Tolerance towards guile is dangerous. It will vitiate your organization's culture and set a bad trend in your organization. Why don't you want to sack this fellow? Is good performance the reason? If yes, then how can you bargain the organization's values with the misconduct of the employee? If you retain this employee, then others may perceive your MD's leadership as weak.
I would recommend not only sacking the employee but also issuing a service certificate with remarks as "terminated due to misconduct." This will send a signal to all employees that you stand for what is right, and they will think 100 times before engaging in any underhand activity.
Your MD or top management needs to revisit the chapter on "Organizational Culture" in OB once again!
Regards,
DVD